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Keeping Records

To figure your taxes, you need records that show what you earned and what you spent.

Your employer, your brokerage firm, the financial institutions that pay you interest, and the companies that pay you interest or dividends provide details of your earnings to you and to the Internal Revenue Service (IRS). You should have your copies by January 31.

You file a copy of the W-2 form you get from your employer with your tax return. Most of the other reporting forms, called 1099s, that you receive don't have to be filed with your return, but you should keep them with your records. You must submit any 1099-Rs, though. They show retirement income.

Typical tax records

If your broker holds your securities for you – which is known as holding securities in street name– you'll get a Consolidatedor Substitute 1099.

Keeping your own records

You must keep your own records of earnings from other sources, like capital gains, rental income, freelance work, or royalties.

You must also keep records of your expenses if you plan to itemize deductions or plan to claim any exclusions or credits.

It's also important to keep year-end statements that report your annual earnings on various investments. If you earn tax-exempt interest, you may not get a 1099 INT, even though you must report the interest to the IRS.

Experts advise you to take all of the deductions you're eligible for, as long as you have the records to substantiate your claims. If you're worried that the IRS might question something, you can include an explanation when you file your return.

How long should you keep your records?

The IRS usually has three years – called a period of limitations – to audit your return, so you should keep all the relevant records at least that long. But it's important to keep some records longer. For example, you'll want to keep confirmations of stock purchases until you sell the stock and report a capital gain or loss.

If you've underreported your income by 25% or more, the IRS has six years to audit your return. And if you don't file, or you file a false return, they have forever to investigate what you owe.

Verifying expenses

Hold on to the evidence that you spent money for specific things. Your records should include who was paid, when, the type of expense, and the business purpose.

Receipts and canceled checks are usually good records. The photocopies of your canceled checks that your bank or credit union provides are as valid as the actual canceled checks. The IRS recommends that you keep all expense receipts, no matter the amount.

Credit card charge slips sometimes provide a place on the back to record details of an expense. Or you can write on the back anyway, and keep the slip with your other records. Regular entries in an appointment book or expense log, noting costs and other details of a meeting or purchase are also valid records.

There are special record-keeping requirements for tips, business use of your car, travel and entertainment, and non-cash charitable contributions. For details see IRS Publication 17 or Publication 552, "Recordkeeping for Individuals."

Send no originals

If you're providing backup documentation of your expenses or deductions, never send your originals to the IRS. Instead send photocopies. Papers can get lost or misplaced, and, in any case, they're unlikely to be returned to you. That could pose a real problem if you need the information in the future.

Any tax or legal information in this website is merely a summary of our understanding and interpretations of some of the current income tax regulations and is not exhaustive. Investors should consult their tax advisor or legal counsel for advice and information concerning their particular situation. Wells Fargo Funds Management, LLC, Wells Fargo Funds Distributor, LLC, nor any of their representatives may give legal or tax advice.

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